Keac 202

318 Accountancy
Financial Statements - II 9
I n chapter 8, you learnt about the preparation of

simple final accounts in the format of trading
and profit and loss account and balance sheet. The
preparation of simple final accounts pre-supposes
Learning Objectives
the absence of any accounting complexities
After studying this chapter, which are normal to business operations. These
you will be able to : complexities arise due to the fact that the process of
• describe the need for determining income and financial position is based
ad ju st m e nt s w h ile
preparing the financial
on the accrual basis of accounting. This emphasises
statements; that while ascertaining the profitability, the revenues
• explain the accounting be considered on earned basis and not on receipt
treatment of adju st basis, and the expenses be considered on incurred
ments for outstanding basis and not on paid basis. Hence, many items
and prepaid expenses, need some adjustment while preparing the financial
accrued and advance statements. In this chapter we shall discuss all items
receipts of incomes;
which require adjustments and the way these are
• discuss the adjust-
ments to be made re
brought into the books of account and incorporated
garding deprecia-tion, in the final accounts.
bad debts, provis ion
for doubtful debts, pro 9.1 Need for Adjustments
vision for discount on
debtors; According to accrual concept of accounting, the
• explain the concepts profit or loss for an accounting year is not based
and adjustment of on the revenues realised in cash and the expenses
manager’s commission paid in cash during that year. There may exist some
and interest on capital; receipts and expenses in the current year which
• prepare profit and loss partially relate to the previous year or to the next
account and balance year. Also, there may exist incomes and expenses
sheet with adjust-
relating to the current year that still need to be
ments.
brought into books of account. Such items duly
adjusted, the final accounts will not reflect the true
and fair view of the state of affairs of the business.
Rationalised 2023-24
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For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance
premium. Any general insurance premium paid usually covers a period of 12
months. Suppose the accounting year ends on March 31, 2017, it would mean
that one fourth of the insurance premium is paid on July 01, 2016 relate to
the next accounting year 2017-18. Therefore, while preparing the financial
statements for 2016-17, the expense on insurance premium that should be
debited to the profit and loss account is ` 900 (` 1,200 – ` 300).
Let us take another example. The salaries for the month of March, 2017 were
paid on April 07, 2017. This means that the salaries account of 2016-17 does
not include the salaries for the month of March 2017. Such unpaid salaries is
termed as salaries outstanding which have to be brought into books of account
and is debited to profit and loss account along with the salaries already paid
for the month of April, 2016 up to Feburary, 2017.
Similarly, adjustments may also become necessary in respect of certain
incomes received in advance or those which have accrued but are still to be
received. Apart from these, there are certain items which are not recorded on
day-to-day basis such as depreciation on fixed assets, interest on capital, etc.
These are adjusted at the time of preparing financial statements. The purpose
of making various adjustments is to ensure that the final accounts reveal the
true profit or loss and the true financial position of the business. The items
which usually need adjustments are:
1. Closing stock
2. Outstanding/expenses
3. Prepaid/Unexpired expenses
4. Accrued income
5. Income received in advance
6. Depreciation
7. Bad debts
8. Provision for doubtful debts
9. Provision for discount on debtors
10. Manager’s commission
11. Interest on capital
It may be noted that when we prepare the financial statements, we are
provided with the trial balance and some other additional information in
respect of the adjustments to be made. All adjustments are reflected in the
final accounts at two places to complete the double entry. Our earlier example
in chapter 8 (Page no. 294) which represents the trial balance of Ankit is
reproduced in figure 9.1:
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320 Accountancy
Trial Balance of Ankit as on March 31, 2017
Account Title Elements L.F. Debit Credit

Amount Amount
` `
Cash Assets 1,000

Bank Assets 5,000
Wages Expense 8,000
Salaries Expense 25,000
Furniture Assets 15,000
Rent of building Expense 13,000
Debtors Assets 15,500
Bad debts Expense 4,500
Purchases Expense 75,000
Capital 12,000
Equity
Sales Revenue 1,25,000
Creditors Liabilities 15,000
Long-term loan (raised on 1.4.2013) Liabilities 5,000
Commission received Revenue 5,000
Total 1,62,000 1,62,000
Additional Information : The stock on March 31, 2017 was ` 15,000.
Figure 9.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe
how these adjustments are helpful in the preparation of financial statements
in order to reflect the true profit and loss and financial position of the firm.
9.2 Closing Stock

As per the example in chapter 9 (Page no. 336), the closing stock represents
the cost of unsold goods lying in the stores at the end of the accounting period.
The adjustment with regard to the closing stock is done by (i) by crediting it to
the trading and profit and loss account, and (ii) by showing it on the asset side
of the balance sheet. The adjustment entry to be recorded in this regard is :
Closing stock A/c Dr.
To Trading A/c
The closing stock of the year becomes the opening stock of the next year
and is reflected in the trial balance of the next year. The trading and profit
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and loss account of Ankit for the year ended March 31, 2017 and his balance
sheet as on that date shall appear as follows :
Trading and Profit and Loss Account of Ankit

for the year ended March 31, 2017
Dr. Cr.
Expenses/Losses Amount Revenues/Gains Amount
` `
Purchases 75,000 Sales 1,25,000
Wages 8,000 Closing stock 15,000
Gross profit c/d 57,000
1,40,000 1,40,000
Salaries 25,000 Gross profit b/d 57,000
Rent of building 13,000 Commission received 5,000
Bad debts 4,500
Net profit (transferred to 19,500
Ankit’s capital account)
62,000 62,000
Sometimes the opening and closing stock are adjusted through purchases
account. In that case, the entry recorded is as follows :
Closing stock A/c Dr.
To Purchases A/c
This entry reduces the amount in the purchases account and is also
known as adjusted purchases which is shown on the debit side of the trading
and profit and loss account. In this context, it may be noted, that the closing
stock will not be shown on the credit side of the trading and profit and loss as
it has been already been adjusted through the purchases account. Not only,
in such a situation, even the opening stock will not be separately reflected in
the trading and profit and loss account, as it is also adjusted in purchases by
recording the following entry:
Purchases A/c Dr.
To Opening stock A/c
Another important point to be noted in this context is that when the
opening and closing stocks are adjusted through purchases, the trial
balance does not show any opening stock. Instead, the closing stock
shall appear in the trial balance (not as additional information or as an
adjustment item) and so also the adjusted purchases. In such a situation,
the adjusted purchases shall be debited to the trading and profit and
loss account.
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322 Accountancy
The closing stock shall be shown on the assets side of the balance sheet as
shown below:
Balance Sheet of Ankit as at March 31, 2017
Liabilities Amount Assets Amount
` `
Owners funds Non-Current Assets
Capital 12,000 Furniture 15,000
Add Net profit 19,500 31,500 Current Assets
Non-Current Liabilities Debtors 15,500
Long-term loan 5,000 Bank 5,000
Current Liabilities Cash 1,000
Creditors 15,000 Closing stock 15,000
51,500 51,500
9.3 Outstanding Expenses

It is quite common for a business enterprise to have some unpaid expenses
in the normal course of business operations at the end of an accounting year.
Such items usually are wages, salaries, interest on loan, etc.
When expenses of an accounting period remain unpaid at the end of an
accounting period, they are termed as outstanding expenses. As they relate to
the earning of revenue during the current accounting year, it is logical that
they should be duly charged against revenue for computation of the correct
amount of profit or loss. The entry to bring such expenses into account is :
Concerned expense A/c Dr.
To Outstanding expense A/c
The above entry opens a new account called Outstanding Expenses which is
shown on the liabilities side of the balance sheet. The amount of outstanding
expenses is added to the total of expenses under a particular head for the
purpose of preparing trading and profit and loss account.
For example, refer to Ankit’s trial balance (refer figure 10.1). You will notice
that wages are shown at ` 8,000. Let us assume that Ankit owes `500 as
wages relating to the year 2016-17 to one of his employees. In that case, the
correct expense on wages amounts to ` 8,500 instead of ` 8,000. Ankit must
show ` 8,500 as expense on account of wages in the trading and profit and
loss account and recognise a current liability of ` 500 towards the sum owed
to his staff. It will be referred to as wages outstanding and it will be adjusted
to wages account by recording the following journal entry:
Wages A/c Dr. 500
To Wages outstanding A/c 500
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The amount of outstanding wages will be added to wages account for the
preparation of the trading and profit and loss account as follows :

Dr. Cr.
` `
Wages 8,000
Add Outstanding wages 500 8,500 Closing stock 15,000
1,40,000 1,40,000
Bad debts 4,500
61,500 61,500
Observe carefully the trading and profit and loss account of Ankit. Did you
notice the amount of net profit is reduced to ` 19,000 on account of outstanding
wages. The item relating to outstanding wages will be shown in balance sheet
as follows :

` `
Owners Funds Non-Current Assets
Add Profit 19,000 31,000 Current Assets
Long-term loan 5,000 Bank 5,000
Current Liabilities Cash 1,000
Outstanding wages 500
51,500 51,500
9.4 Prepaid Expenses

There are several items of expense which are paid in advance in the normal
course of business operations. At the end of the accounting year, it is found
that the benefits of such expenses have not yet been fully received; a portion
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324 Accountancy
of its benefit would be received in the next accounting year. This portion of
expense, is carried forward to the next year and is termed as prepaid expenses.
The necessary adjustment in respect of prepaid expenses is made by recording
the following entry:
Prepaid expense A/c Dr.
To concerned expense A/c
The effect of the above adjustment entry is that the amount of prepaid part
is deducted from the total of the particular expense, and the new account of
prepaid expense is shown on the assets side of the balance sheet. For example,
in Ankit’s trial balance, let us assume that the amount of salary paid by him
to the employees includes an amount of ` 5,000 which was paid in advance to
one of his employees upon his joining the office. This implies that Ankit has
overpaid his staff by ` 5,000 on account of his salary. Hence, correct expense
on account of salary during the current period will be ` 20,000 instead of `
25,000. Ankit must show ` 20,000 expense on account of salary in the profit and
loss account and recognise a current asset of ` 5,000 as an advance salary to
the employee. It will be termed as prepaid salary account and will be recorded
by the following journal entry :
Prepaid salary A/c Dr. 5,000
To salary A/c 5,000
The account of prepaid salary will be shown in the trading and profit and
loss account as follows:

Dr. Cr.
` `
Add Outstanding wages 500 8,500
1,40,000 1,40,000
Less Prepaid salary (5,000) 20,000
Bad debts 4,500
Net profit (transferred to Ankit 24,000
capital account)
61,500 61,500
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Observe how the prepaid salary has resulted in an increase of net profit by
` 5,000 making it as ` 24,000 Further, the item relating to prepaid salary will
be shown in the balance sheet on the assets side as follows :

` `

Long-term loan 5,000 Prepaid salary 5,000
Current Liabilities Bank 5,000
Cash 1,000
Outstanding wages 500
56,500 56,500
9.5 Accrued Income

It may also happen that certain items of income such as interest on loan,
commission, rent, etc. are earned during the current accounting year but have
not been actually received by the end of the same year. Such incomes are known
as accrued income. The adjusting entry for accrued income is :
Accrued income A/c Dr.
To Concerned income A/c
The amount of accrued income will be added to the related income in the
profit and loss account and the new account of accrued income will appear on
the asset side of the balance sheet.
Let us, for example, assume that Ankit was giving a little help to a fellow
businessman by introducing few parties to him on commission for this
service. In the trial balance of Ankit you will notice an item of commission
received amounting to ` 5,000. Assume that the commission amounting to
`1,500 was still receivable from the fellow businessman. This implies that
income from commission earned during 2016-17 is ` 6, 500 (`5, 000 + `
1,500) Ankit needs to record an adjustment entry to give effect to the accrued
commission as follows :
Accrued Commission A/c Dr. 1,500
To Commission A/c 1,500
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326 Accountancy
The account of accrued income will be recorded in trading and profit and
loss account as follows :

Dr. Cr.
` `

Add Outstanding 500 8,500
1,40,000 1,40,000

Rent of building 13,000 Commission received5,000
Add Accrued 1,500 6,500
Bad debts 4,500 commission
63,000 63,000
Observe that the accrued income has resulted in an increase in the net
profit by ` 1,500 making it as ` 25,500. Further, it will be shown in the balance
sheet of Ankit on the assets side under the head current asset.

` `

Current Liabilities Accrued commission 1,500
Creditors 15,000 Bank 5,000
Outstanding wages 500 Cash 1,000
Closing stock 15,000
58,000 58,000
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9.6 Income Received in Advance

Sometimes, a certain income is received but the whole amount of it does not
belong to the current period. The portion of the income which belongs to the
next accounting period is termed as income received in advance or an Unearned
Income. Income received in advance is adjusted by recording the following entry:
Concerned income A/c Dr.
To Income received in advance A/c
The effect of this entry will be that the balance in the income account will
be equal to the amount of income earned for the current accounting period,
and the new account of income received in advance will be shown as a liability
in the balance sheet.
For example, let us assume Ankit has agreed in March 31, 2017 to sublet
a part of the building to a fellow shopkeeper @ ` 1,000 per month. The
person gives him rent in advance for the next three months of April, May and
June. The amount received had been credited to the profit and loss account.
However, this income does not pertain to current year and hence will not be
credited to profit and loss account. It is income received in advance and will
be recognised as a liability amounting to ` 3,000. Ankit needs to record an
adjustment entry to give effect to income received in advance by way of following
journal entry:
Rent received A/c Dr. 3,000
To Rent received in advance A/c 3,000
This will lead a new account of rent received in advance of ` 3,000 which
will appear as follows :

` `
Owners Funds Non Current Assets
Add Net profit 25,500 37,500 Current Assets
Non Current Liabilities Debtors 15,500
Current Liabilities Accrued commission 1,500
Creditors 15,000 Bank 5,000
Rent received in advance 3,000 Closing stock 15,000
61,000 61,000
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328 Accountancy
9.7 Depreciation
Recall from chapter 7 (Part-I), that depreciation is the decline in the value
of assets on account of wear and tear and passage of time. It is treated as
a business expense and is debited to profit and loss account. This, in effect,
amounts to writing-off a portion of the cost of an asset which has been used
in the business for the purpose of earning profits. The entry for providing
depreciation is :
Depreciation A/c Dr.
To Concerned asset A/c
In the balance sheet, the asset will be shown at cost minus the amount of
depreciation. For example, the trial balance in our example shows that Ankit
has a furniture account with a balance of ` 15,000. Let us assume that furniture
is subject to a depreciation of 10% per annum. This implies that Ankit must
recognise that at the end of the year the value attached to furniture is to be
reduced by ` 1,500 (` 15,000 × 10%). Ankit needs to record an adjustment
entry to give effect to depreciation on furniture as follows :
Depreciation A/c Dr. 1,500
To Furniture A/c 1,500
Depreciation will be shown in the profit and loss account and balance sheet
as follows :
Dr. Cr.
` `

Add Outstanding wages (500) 8,500
Gross Profit c/d 56,500
1,40,000 1,40,000

Rent of building 13,000 Commission received 5,000 6,500
Add Accrued 1,500
Depreciation-Furniture 1,500 Commission
Bad debts 4,500
63,000 63,000
Notice that the amount of net profit declines with the adjustment of depreciation.
Let us now see how depreciation as an expense will be shown in balance sheet.
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Balance Sheet of Ankit

as at March 31, 2017

` `

Add Profit 24,000 36,000 Less Depreciation (1,500) 13,500
Non-Current Liabilities Current Assets
Long-term loan 5,000 Debtors 15,500
Current Liabilities Prepaid salary 5,000
Creditors 15,000 Accrued commission 1,500
Outstanding wages 500 Bank 5,000
Rent received in advance 3,000 Cash 4,000
59,500 59,500
9.8 Bad Debts

Bad debts refer to the amount that the firm has not been able to realise from
its debtors. It is regarded as a loss and is termed as bad debt. The entry for
recording bad debt is:
Bad debts A/c Dr.
To Debtors A/c
You will notice in Ankit’s trial balance, that it contains bad debts amounting
to ` 4,500. Whereas, the sundry debtors of Ankit are reported as ` 15,500. The
existence of bad debts in the trial balance signifies that Ankit has incurred
a loss arising out of bad debts during the year and which has been already
recorded in the books of account.
However, assuming one of his debtors who owed him ` 2,500 had become
insolvent, and nothing is receivable from him. But the amount of bad debts
related to the current year is still to be account for. This fact appears as
additional information and is termed as further bad debts. The adjustment
entry to be recorded for the amount will be as follows. For this purpose, Ankit
needs to record an adjustment entry as under :
Bad debts A/c Dr. 2,500
To Debtors A/c 2,500
This entry will reduce the value of debtors to ` 13,000( ` 15,500 –
` 2,500) and increases the amount of bad debts to ` 7,000 (` 4,500 +
` 2,500).
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330 Accountancy
The treatment of further bad debts in profit and loss account and balance
sheet is shown below :
Dr. Cr.
` `
1,40,000 1,40,000
1,500 commission
Depreciation – Furniture
Bad Debts 4,500
Add Further bad debts 2,500 7,000
63,000 63,000

` `
Add Profit 21,500 33,500 Less Depreciation (1,500) 13,500
Less Further bad debts(2,500

) 13,000
Current Liabilities and Provisions Prepaid salary 5,000
Bank 5,000
Outstanding Wages 500 Cash 4,000
Rent received in advance 3,000
57,000 57,000
9.9 Provision for Bad and Doubtful Debts

In the above balance sheet, debtors now appears at ` 13,000, which is their
estimated realisable value during next year. It is quite possible that the whole
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of this amount may not be realised in future. However, it is not possible to

accurately know the amount of such bad debts. Hence, we make a reasonable
estimate of such loss and provide the same. Such provision is called provision
for bad debts and is created by debiting profit and loss account. The following
journal entry is recorded in this context :
Profit and Loss A/c Dr.
To Provision for doubtful debts A/c
Provision for doubtful debts is also shown as a deduction from the debtors
on the asset side of the balance sheet.
Let us assume, Ankit feels that 5% of his debtors on March 31, 2017 are
likely to default on their payments next year. This implies he expects bad debts
of ` 650 (` 13,000 × 5%). Ankit needs to record the adjustment entry as :
Profit and loss A/c Dr. 650
To Provision for doubtful debts A/c 650
This implies that ` 650 will reduce the current year’s profit on account
of doubtful debts. In the balance sheet, it will be shown as a deduction from
sundry debtors.

Dr. Cr.

` `

1,40,000 1,40,000
Depreciation – Furniture 1,500 Add Accrued 1,500 6,500
Bad debts 4,500 commission
Provision for doubtful debts 650
Net profit (transferred to Ankit’s 20,850
capital account)
63,000 63,000
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332 Accountancy

` `

Add Net profit 20,850 32,850 Less Depreciation (1,500) 13,500
Less Furtherbad debts 2,500
13,000
Less Provision for 650
12,350 doubtful debts
Current Liabilities & Provisions Prepaid salary 5,000
Outstanding wages 500 Bank 5,000
56,350 56,350
It may be noted that the provision created for doubtful debts at the end of
a particular year will be carried forward to the next year and it will be used for
meeting the loss due to bad debts incurred during the next year. The provision
for doubtful debts brought forward from the previous year is called the opening
provision or old provision.When such a provision already exists, the loss due
to bad debts during the current year are adjusted against the same and while
making provision for doubtful debts required at the end of the current year
is called new provision. The balance of old provision as given in trial balance
should also be taken into account.
Let us take an example to understand how bad debts and provision for
doubtful debts are recorded. An extract from a trial balance on March 31, 2017
is given below :
`
Sundry debtors 32,000
Bad debts 2,000
Provision for doubtful debts 3,500
Additional Information :
Write-off further bad debts ` 1,000 and create a provision for doubtful debts
@ 5% on debtors.
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In this case, the following journal entries will be recorded :
Debit Credit
Date Particulars L.F. Amount Amount
` `
March (a) Bad debts A/c Dr. 1,000

31, 2017 To Sundry debtors 1,000
(Futher bad debts)
(b) Provision for doubtful debts A/c Dr. 3,000

To Bad debts A/c 3,000
(Bad debts adjusted against the provision)
Profit and Loss A/c Dr. 1,050

To Provision for doubtful debts A/c 1,050
(Amount charges from profit and loss account)
Profit and Loss Account

` `
Provision for doubtful debts:
Bad debts 2,000
Further bad debts 1,000
New provision 1,550
4,550
Less Old p rovision 3,500 1,050
*Only relevant items.
Balance Sheet as at March 31, 2017
`
Less Further (1,000)
bad debts 31,000
Less Provision (1,550)
for doubtful debts 29,450
*Only relevant items.

Note : The amount of new provision for doubtful debts has been calculated as follows:
` 31,000 1 × 5/100 = ` 1,550.
9.10 Provision for Discount on Debtors

A business enterprise allows discount to its debtors to encourage prompt
payments. Discount likely to be allowed to customers in an accounting year
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334 Accountancy
can be estimated and provided for by creating a provision for discount on

debtors. Provision for discount is made on good debtors which are arrived at by
deducting further bad debts and the provision for doubtful debts. The following
journal entry is recorded to create provision for discount on debtors:
Profit and loss A/c Dr.
To Provision for discount on debtors A/c
As stated above, the provision for discount on debtors will be created only
on good debtors. It will be calculated on the amount of debtors arrived at after
deducting the doubtful debts, i.e. ` 12,350 (` 13,000 – ` 650).
Ankit needs to record the adjustment entry as :
Profit and loss A/c Dr. 227
To Provision for discount on debtors A/c 227
This will reduce the current year profit by ` 227 on account of probable
discount on prompt payment. In the balance sheet, it will be shown as a
deduction from the debtors account to portray correctly the expected realiable
value of debtors as ` 12,123.

Dr. Cr.

` `

Add Outstanding wages (500) 8,500
1,40,000 1,40,000
Depreciation–Furniture 1,500 commission
Bad debts 4,500
Add Further bad debts 2,500 7
,000
Provision for discount on debtors 227
63,000 63,000
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Balance Sheet of Ankit as on March 31, 2017

` `

Less Further 2,500
bad debts 13,000
Less Provision
for doubtful 650
debts
12,350
Less Provision
for discount
on debtors (227) 12,123
Current Liabilities & Provisions Prepaid salary 5,000
Bank 5,000
Rent received in advance 3,000
56,123 56,123
In the subsequent year, the discount will be transferred to the provision for
discount on debtors account. The account will be treated in the same manner
as the provision for doubtful debts.
9.11 Manager’s Commission
The manager of the business is sometimes given the commission on the net
profit of the company. The percentage of the commission is applied on the profit
either before charging such commission or after charging such commission.
In the absence of any such information, it is assumed that commission is
allowed as a percentage of the net profit before charging such commission.
Suppose the net profit of a business is ` 110 before charging commission.
If the manager is entitled to 10% of the profit before charging such commission,
the commission will be calculated as :
= ` 110 × = ` 11
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336 Accountancy
In case the commission is 10% of the profit after charging such commission,
it will be calculated as :
= Profit before commission × Rate of commission/ (100 + commission)
The managers commission will be adjusted in the books of account by

recording the following entry :
Profit and loss A/c Dr.
To Manager’s commission A/c
Let us recall our example and assume that Ankit’s manager is entitled to a
commission @ 10%. Observe the following profit and loss account if it is based
on :
(i) amount of net profit before charging such commission
(ii) amount of profit after charging such commission.
(i) Trading and Profit and Loss Account of Ankit

Dr. Cr.

` `

1,40,000 1,40,000
Salaries 25,000 Gross profit 56,500
1,500 commission
Depreciation – Furniture
Bad debts 4,500
Add Further bad debts 2,500 7
,000
Provision for discount on debtors 227
Manager’s commission 2,062
63,000 63,000
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` `
Less Further bad debts(2,500)
13,000
Less Provision for
Current Liabilities and Provisions doubtful (650)
Creditors 15,000 debts 12,350
Less Provision for
discount on debtors (227) 12,123
Outstanding wages 500 Prepaid salary 5,000
Rent received in advance 3,000 Accrued commission 1,500
Bank 5,000
Cash 4,000
Manager’s commission 2,062 Closing stock 15,000
outstanding
56,123 56,123
(ii) Trading and Profit and Loss Account of Ankit

Dr. Cr.
` `
1,40,000 1,40,000
1,500 commission
Depreciation–Furniture
Bad debts 4,500
Provision for
doubtful debts 650
Provision for discount on
debtors
227
Manager’s commission 1,875
Net profit (transferred to
Ankit’s capital account) 18,748
63,000 63,000
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338 Accountancy

` `
Non-Current Liabilities
Long-term loan 5,000 Current Assets
Debtors 15,500
Less Further bad debts(2,500)
13,000
Less Provision
for doubtful (650)
debts 12,350
Less Provision for
Current Liabilities and Provisions discount on debtors(227) 12,123
Creditors 15,000 Prepaid salary 5,000
Outstanding wages 500 Accrued commission 1,500
Bank 5,000
Manager commission
outstanding 1,875 Closing stock 15,000
56,123 56,123
9.12 Interest on Capital

Sometimes, the proprietor may like to know the profit made by the business
after providing for interest on capital. In such a situation, interest is calculated
at a given rate of interest on capital as at the beginning of the accounting year.
If however, any additional capital is brought during the year, the interest may
also be computed on such amount from the date on which it was brought into
the business. Such interest is treated as expense for the business and the
following journal entry is recorded in the books of account:
Interest on capital A/c Dr.
To Capital A/c
In the final accounts, it is shown as an expense on the debit side of the
profit and loss account and added to capital in the balance sheet.
Let us assume, Ankit decides to provide 5% interest on his capital. This
shall amount to ` 600 for which the following journal entry will be recorded:
Interest on capital A/c Dr. 600
To Capital A/c 600
This implies that net profit shall be reduced by ` 600. As a result, the
reduced amount of profit shall be added to the capital in the balance sheet.
Ch-09.indd 338 9/13/2022 5:00:28 PM

But, when interest on capital shall be added to the capital, this effect shall be
neutralised. As shown below :
`
Capital 12,000
Add Profit 17,961
29,961
Add Interest on capital 600
30,561
Test Your Understanding
Tick the correct answer :

1. Rahul’s trial balance provide you the following information :
Debtors ` 80,000
Bad debts ` 2,000
Provision for doubtful debts ` 4,000
It is desired to maintain a provision for bad debts of ` 1,000
State the amount to be debited/credited in profit and loss account :
(a) ` 5,000 (Debit) (b) ` 3,000 (Debit)
(c) ` 1,000 (Credit)(d) none of these.
2. If the rent of one month is still to be paid the adjustment entry will be :
(a) Debit outstanding rent account and Credit rent account
(b) Debit profit and loss account and Credit rent account
(c) Debit rent account and Credit profit and loss account
(d) Debit rent account and Credit outstanding rent account.
3. If the rent received in advance ` 2,000. The adjustment entry will be :
(a) Debit profit and loss account and Credit rent account
(b) Debit rent account Credit rent received in advance account
(c) Debit rent received in advance account and Credit rent account
(d) None of these.
4. If the opening capital is ` 50,000 as on April 01, 2016 and additional capital
introduced ` 10,000 on January 01, 2017. Interest charge on capital 10% p.a.
The amount of interest on capital shown in profit and loss account as on March
31, 2017 will be :
(a) ` 5,250 (b) ` 6,000
(c) ` 4,000 (d) Rs, 3,000.
5. If the insurance premium paid ` 1,000 and pre-paid insurance ` 300. The amount
of insurance premium shown in profit and loss account will be :
(a) ` 1,300 (b) ` 1,000
(c) ` 300 (d) ` 700.
Ch-09.indd 339 9/13/2022 5:00:28 PM

340 Accountancy
Adjustment Adjustment Entry Treatment in Trading Treatment in

and Profit and Loss Balance Sheet
Account
1. Closing stock Closing stock A/c Dr. Shown on the credit Shown on the
To Trading A/c assets side and profit assets side
and loss account
2. Outstanding Expense A/c Dr. Added to the Shown on the

expenses To outstanding respective expense liabilities side
expense A/c on the debit side
3. Prepaid/ Prepaid expense A/c Dr. Deducted from the Shown on the
Unexpired To Expenses A/c respective expense on assets side
expenses the debit side
4. Income earned Accured income A/c Dr. Added to the Shown on the
but not received To Income A/c respective income assets side
on the credit side
5. Income received Income A/c Dr. Deducted from the Shown on the
in advance To Income received respective income liabilities
in advence A/c on the credit side sides
6. Depreciation Depreciaton A/c Dr. Shown on the debit Deducted from

To Assets A/c side the value of
asset
7. Provision for Profit and Loss A/c Dr. Shown on the debit Shown as
bad and To Provision for side deduction
doubtful debts doubtful debts from debtors
8. Provision for Profit and Loss A/c Dr. Shown on the debit Shown as
discount on To Provision for side deductoin
debtors discount debtors form debtors
9. Manager’s Manager’s Dr. Shown on the debit Shown on the

commission commission A/c side liabilities side
To outstanding
commission A/c
10. Interest on Interest on capital A/c Dr. Shown on the debit Shown as
capital To capital A/c side addition to
capital
11. Further bad Bad debts A/c Dr. Shown on the debit Deducted from
debts To Sundry Debtors A/c side debtors
Fig. 9.2 : Showing treatment of various types of adjustments
Ch-09.indd 340 9/13/2022 5:00:28 PM

Illustration 1
From the following balances, prepare the trading and profit and loss account and balance
sheet as on March 31, 2017.
Debit Balances Amount Credit Balances Amount
` `
Drawings 6,300 Capital 1,50,000
Cash at bank 13,870 Discount received 2,980
Bills receivable 1,860 Loans 15,000
Loan and Building 42,580 Purchases return 1,450
Furniture 5,130 Sales 2,81,500
Discount allowed 3,960 Reserve for bad debts 4,650
Bank charges 100 Creditors 18,670
Salaries 6,420
Purchases 1,99,080
Stock (opening) 60,220
Sales return 1,870
Carriage 5,170
Rent and Taxes 7,680
General expenses 3,630
Plant and Machinery 31,640
Book debts 82,740
Bad debts 1,250
Insurance 750
4,74,250 4,74,250
Adjustments
1. Closing stock ` 70,000
2. Create a reserve for bad and doubtful debts @ 10% on book debts
3. Insurance prepaid ` 50
4. Rent outstanding ` 150
5. Interest on loan is due @ 6% p.a.
Solution
Trading and Profit and Loss Account
Dr. Cr.
` `
Opening stock 60,220 Sales 2,81,500
Purchase 1,99,080 Less : Sales return (1,870) 2,79,630
Less Purchases return (1,450) 1,97,630 Closing stock 70,000
Carriage 5,170
3,49,630 3,49,630
Ch-09.indd 341 9/13/2022 5:00:28 PM

342 Accountancy
Discount allowed 3,960 Gross profit b/d 86,610

Bank charges 100 Discount received 2,980
Salaries 6,420
Add Rent outstanding 150 7,830
Insurance 750
Less Insurance prepaid (50) 700
Bad debts 1,250
Add New provision 8,274
for bad debts 9,524
Less Old provision (4,650)
for bad debts 4,874
Interest on loan outstanding 900
capital account)
89,590 89,590

` `
Creditors 18,670 Cash at bank 13,870

Loan 15,000
Add Interest on loan 900 15,900 Book debts 82,740
outstanding
Rent outstanding 150 Less Reserve (8,274) 74,466
for bad debts
Capital 1,50,000 Bills receivable 1,860
Add Net profit 61,176 Land and Building 42,580
2,11,176 Furniture 5,130
Less Drawings (6,300) 2,04,876 Plant and Machinery 31,640
Insurance (prepaid) 50
2,39,596 2,39,596
Ch-09.indd 342 9/13/2022 5:00:28 PM

Illustration 2
The following were the balances extracted from the books of Yogita as on March 31, 2017:

` `
Cash in hand 540 Sales 98,780

Cash at bank 2,630 Return outwards 500
Purchases 40,675 Capital 62,000
Return inwards 680 Sundry creditors 6,300
Wages 8,480 Rent 9,000
Fuel and Power 4,730
Carriage on sales 3200
Carriage on purchases 2040
Opening stock 5,760
Building 32,000
Freehold land 10,000
Machinery 20,000
Salaries 15,000
Patents 7,500
Insurance 600
Drawings 5,245
Taking into account the following adjustments prepare trading and profit and loss
account and balance sheet as on March 31, 2017 :
(a) Stock in hand on March 31, 2017, was ` 6,800.
(b) Machinery is to be depreciated at the rate of 10% and patents @ 20%.
(c) Salaries for the month of March, 2017 amounting to ` 1,500 were outstanding.
(d) Insurance includes a premium of ` 170 on a policy expiring on September 30, 2017.
(e) Further bad debts are ` 725. Create a provision @ 5% on debtors.
(f) Rent receivable ` 1,000.
Ch-09.indd 343 9/13/2022 5:00:28 PM

344 Accountancy
Solution
Books of Yogita
Dr. Cr.
` `
Opening stock 5,760
Purchases 40,675 Sales 98,780
Less Return outwards (500) 40,175 Less Return inwards (680) 98,100
Carriage on purchases 2,040
1,04,900 1,04,900
Add Outstanding salaries 1,500 16,500 Rent 9,000
Carriage 3,200 Add Accrued rent 1,000 10,000
Insurance 600
Less Prepaid insurance (85) 515
Further bad debts 725
Add Provision for doubtful debts 689 1,414
Depreciation : machinery 2,000
Patent 1,500 3,500
Net profit 25,586
(transferred to capital account)
53,715 53,715

Dr. Cr.
` `
Sundry creditors 6,300 Cash in hand 540
Cash in bank 2,630
Salaries outstanding 1,500 Sundry debtors 14,500
Capital 62,000 Less Further (725)
bad debts 13,775
Less Provision (689) 13,086
for bad debts
Add Net profit25,586 Insurance prepaid 85
87,586 Stock 6,800
Rent accrued 1,000
Less Drawings (5,245) 82,341 Freehold land 10,000
Building 32,000
Machinery 20,000
Less Depreciation (2,000) 18,000
Patents 7,500
90,141 90,141
Ch-09.indd 344 9/13/2022 5:00:28 PM

Illustration 3
The following balances were extracted from the books of Shri R. Lal on March 31, 2017:
Account Title Amount Account Title Amount

` `
Capital 1,00,000 Rent (Cr.) 2,100

Drawings 17,600 Railway freight on sales 16,940
Purchases 80,000 Carriage inwards 2,310
Sales 1,40,370 Office expenses 1,340
Purchases return 2,820 Printing and Stationery 660
Stock on April 01, 2016 11,460 Postage and Telegram 820
Bad debts 1,400 Sundry debtors 62,070

doubtful debts reserve 3,240 Sundry creditors 18,920
April 01, 2016
Cash in bank 12,400
Rates and Insurance 1,300 Cash in hand 2,210
Discount (Cr.) 190 Office furniture 3,500
Bills receivable 1,240 Salaries and Commission 9,870
Sales returns 4,240 Addition to buildings 7,000
Wages 6,280
Buildings 25,000
Prepare the trading and profit and loss account and a balance sheet as on March 31,
2017 after keeping in view the following adjustments :
(i) Depreciate old building by ` 625 and addition to building at 2% and office furniture
at 5%.
(ii) Write-off further bad debts ` 570.
(iii) Increase the bad debts reserve to 6% of debtors.
(iv) On March 31, 2017 ` 570 are outstanding for salary.
(v) Rent receivable ` 200 on March 31, 2017.
(vi) Interest on capital at 5% to be charged.
(vii) Unexpired insurance ` 240.
(viii) Stock was valued at ` 14,290 on March 31, 2017.
Ch-09.indd 345 9/13/2022 5:00:28 PM

346 Accountancy
Solution
Books of Shri R. Lal
Dr. Cr.

` `

Purchases 80,000 Less Sales Return (4,240) 1,36,130
Less Purchase return (2,820) 77,180
Carriage inwards 2,310
1,50,420 1,50,420
Railway freight on sales 16,940 Gross profit c/d 53,190

Rent 2,100
Office expenses 1,340 Add Accrued rent 200 2,300
Postage and Telegram 820 Discount 190
Printing and Stationery 660
Salary and Commission 9,870
Add Outstanding salary 570 10,440
Rates and Insurance 1,300
Less unexpired insurance (240) 1,060
Bad debts 1,400
Add Further bad debts 570
Add New doubtful debts 3,690
provision 5660
Less Old provision (3,240) 2,420
for bad debts
Interest on capital 5,000
Depreciation on building 625
Depreciation on addition 140
to building
Depreciation on furniture 175
capitalaccount)
55,680 55,680
Ch-09.indd 346 9/13/2022 5:00:28 PM

` `
Sundry creditors 18,920 Cash at bank 12,400
Outstanding salaries 570 Cash in hand 2,210
Capital 1,00,000 Bills receivable 1,240
Add Net profit 16,060
Add Interest on capital 5,000
1,21,060 Debtors 62,070
Less Further bad debts (570)
Less Drawings (17,600) 1,03,460 61,500
Less New provision (3,690) 57,810
for doubtful debts
Accrued rent 200
Unexpired insurance 240
Building 25,000
Less Depreciation (625) 24,375
Addition to building 7,000
Office furniture 3,500
1,22,950 1,22,950
Illustration 4
Prepare the trading profit and loss account of M/s Mohit Traders as on 31 March
2017 and draw necessary Journal entries and balance sheet as on that date :

` `
Purchases 1,60,000 Return outwards 2,000
Cash in hand 16,000 Capital 1,50,000
Cash at bank 32,000 Creditors 64,000
Return inwards 4,000 Bills payable 20,000
Wages 22,000 Commission received 4,000
Insurance 8,000
Buildings 1,00,000
Plant 80,000
Patents 30,000
Salaries 28,000
Furniture 12,000
Drawings 18,000
Rent 2,000
Debtors 80,000
6,40,000 6,40,000
Ch-09.indd 347 9/13/2022 5:00:28 PM

348 Accountancy
Adjustments
`
(a) Salaries outstanding 12,000
(b) Wages outstanding 6,000
(c) Commission is accrued 2,400
(d) Depreciation on building 5% and plant 3%
(e) Insurance paid in advance 700
(f) Closing stock 12,000
Solution
Books of Mohit Traders
Journal
Date Particulars L.F. Debit Credit

Amount Amount
` `
2017
March 31 Salary A/c Dr. 12,000
Wages A/c Dr. 6,000
To Salary outstanding A/c 12,000
To Wages outstanding A/c 6,000
(Amount of salary and wages outstanding
as on March 31, 2017)
March 31 Prepaid Insurance A/c Dr. 1,400

To Insurance A/c 1,400
(Insurance paid in advance]
March 31 Commission accrued A/c Dr. 2,400

To Commission A/c 2,400
(Commission accrued but not received)
March 31 Depreciation A/c Dr. 7,400

To Building A/c 5,000
To Plant A/c 2,400
(Depreciation charged on plant and building)
March 31 Profit and Loss A/c Dr. 1,23,700

To Capital A/c 1,23,700
(Profit transferred to capital account)
Ch-09.indd 348 9/13/2022 5:00:28 PM

Books of Mohit Traders

Dr. Cr.
Expenses /Losses Amount Revenue/Gains Amount
` `
Purchases 1,60,000 Less Returns (4,000) 3,96,000
Less returns (2,000) 1,58,000 Closing stock 12,000
Wages 22,000
Add Outstanding wages 6,000 28,000
Gross profit c/d 1,74,000
4,08,000 4,08,000
Salary 28,000 Gross Profit b/d 1,74,000

Add Outstanding salary 12,000 40,000 Commission received(4,000)
Insurances 8,000 Add Accrued 2,400 6,400
Less Prepaid (700) 7,300 commission
Rent 2,000
Depreciation onbuilding 5,000
Plants 2,400
Net Profit (transferred to capital 1,23,700
account)
1,80,400 1,80,400

` `
Creditors 64,000 Cash in hand 16,000
Bills payable 20,000 Cash at bank 32,000
Capital 1,50.000 Building 95,000
Add Net profit 1,23,700 Plant 77,600
2,73,700 Patents 30,000
Less Drawings (18,000) 2,55,700 Debtors 80,000
Outstanding salaries 12,000 Insurance prepaid 700
Outstanding wages 6,000 Commission accrued 2,400
Furniture 12,000
3,57,700 3,57,700
Ch-09.indd 349 9/13/2022 5:00:28 PM

350 Accountancy
Illustration 5
he following information has been extracted from the trial balance of M/s Randhir
T
Transport Corporation.
Debit balances Amount Credit balances Amount

` `
Opening stock 40,000 Capital 2,70,000

Rent 2,000 Creditors 50,000
Plant and Machinery 1,20,000 Bills payable 50,000
Land and Buildings 2,55,000 Loan 1,10,000
Power 3,500 Discount 1,500
Sales return 2,500 Provision for bad debts 1,000
Telegram and Postage 400 General reserves 50,000
Wages 4,500
Salary 2,500
Insurance 3,200
Discount 1,000
Repair and Renewals 2,000
Legal charges 700
Trade taxes 1,200
Debtors 75,000
Investment 65,000
Bad debts 2,000
Trade expenses 4,500
Commission 1,250
Travelling expenses 1,230
Drawings 20,020
6,82,500 6,82,500
Adjustments
1. Closing stock for the year was ` 35,500.
2. Depreciation charged on plant and machinery 5% and land and building 6%.
3. Interest on drawing @ 6% and Interest on loan @ 5%.
4. Interest on investments @ 4%.
5. Further bad debts 2,500 and make provision for doubtful debts on debtors 5%.
6. Discount on debtors @ 2%.
7. Salary outstanding ` 200.
8. Wages outstanding ` 100.
9. Insurance prepaid` 500.
You are required to make trading and profit and loss account and a balance sheet on
March 31, 2017.
Ch-09.indd 350 9/13/2022 5:00:28 PM

Solution
Books of Randhir Transport Corporation
Expenses/Losses Amount Revenue/Gains Amount

` `

Purchases 75,000 Less Sales return (2,500) 1,47,500
Power 3,500
1,83,000 1,83,000
Rent 2,000 Gross profit b/d 59,900

Telegram and Postage 400 Outstanding interest 2,600
on investment
Salary 2,500 Discount 1,500
Add Outstanding salary 200 2,700 Interest on drawings 1,200
I nsurance 3,200
Less Prepaid (500) 2,700
Discount 1,000
Repair and Renewals 2,000
Legal charges 700
Trade taxes 1,200
Outstanding interest on loan 5,500
Commission 1,250
Discount on debtors 1,450
Depreciation on Plant and 6,000
Machinery
Depreciation on Land and 15,300
Building
Bad debts 2,000
Add Further bad debts 2,500
8,053
Net Profit (transferred to 10,217
capital account)
65,200 65,200
Ch-09.indd 351 9/13/2022 5:00:28 PM

352 Accountancy
` `
Creditors 50,000 Debtors 75,000
Bills payable 50,000 Less Further (2,500)
Loan 1,10,000 bad debts 72,500
Add Outstanding interest 5,500 1,15,500 Less Discount (1,450)
General reserve 50,000 71,050
Capital 2,70,000 Less New Provision (3,553) 67,497
Add Net Profit 10,217 Investment 65,000
2,80,217 Outstanding interest 2,600
on investment
Less Drawings (20,020) Insurancepre-paid 500
2,60,197
ess Interest on drawings 1,200 2,58,997 Plant and Machinery 1,14,000
L
Outstanding salary 200 Land and Building 2,39,700
Outstanding wages 100 Closing stock 35,500
5,24,797 5,24,797
Illustration 6
From the following balances of M/s Keshav Bros. You are required to prepare trading and
profit and loss account and a balance sheet of March 31, 2017.
` `
Plant and Machinery 1,30,000 Sales 3,00,000
Debtors 50,000 Return outwards 2,500
Interest 2,000 Creditors 2,50,000
Wages 1,200 Bills payable 70,000
Salary 2,500 Provision for bad debts 1,550
Carriage inwards 500 Capital 2,20,000
Carriage outwards 700 Rent received 10,380
Return inwards 2,000 Commission received 16,000
Factory rent 1,450
Office rent 2,300
Insurance 780
Furniture 22,500
Buildings 2,80,000
Bills receivable 3,000
Cash in hand 22,500
Cash at bank 35,000
Commission 500
Opening stock 60,000
Purchases 2,50,000
Bad debts 3,500
8,70,430 8,70,430
Ch-09.indd 352 9/13/2022 5:00:28 PM

Adjustment
(i) Provision for bad debts @ 5% and further bad debts ` 2,000.
(ii) Rent received in advance ` 6,000.
(iii) Prepaid insurance` 200.
(iv) Depreciation on furniture @ 5%, plant and machinery @ 6%, building @ 7%.
Solution
Books of Keshav Bros.

Dr. Cr.

` `

Purchases 2,50,000 Less Return (2,000) 2,98,000
Less Returns (2,500) 2,47,500 Closing stock 70,000
Wages 1,200
Carriage inwards 500
Factory rent 1,450
3,68,000 3,68,000
Interest 2,000 Gross profit b/d 57,350

Salary 2,500 Rent received 10,380
Carriage outwards 700 Less Advance rent (6,000) 4,380
Office Rent 2,300 Commission received 16,000
Insurance 780
Less Prepaid insurance (200) 580
Depreciation on furniture 1,125
Depreciation on Plant and 7,800
Machinery
Depreciation on building 19,600
Commission 500
Bad debts 3,500
Add Further bad debts 2,000
7,900
Net Profit (transferred to 34,275
capital account)
77,730 77,730
Ch-09.indd 353 9/13/2022 5:00:28 PM

354 Accountancy
Liabilities Amount Liabilities Amount

` `
Creditors 2,50,000 Cash In hand 22,500

Bills payable 70,000 Cash at bank 35,000
Advance rent 6,000 Bills receivable 3,000
Capital 2,20,000
Add Net profit 34,275 2,54,275 Prepaid insurance 200
Debtors 50,000
Less Further (2,000)
bad debts 48,000
Less New provision (2,400) 45,600
Plant and Machinery 1,22,200
Furniture 21,375
Buildings 2,60,400
5,80,275 5,80,275
Illustration 7
The following information have been taken from the trial balance of M/s Fair Brothers Ltd.
You are required to prepare the trading and profit and loss account and a balance sheet as
at March 31, 2017.
Debit Balances Amount Credit balances Amount

` `
Cash 20,000 Sales 3,61,000

Wages 45,050 Loan 12% (1.7.2016) 40,000
Return outwards 4,800 Discount received 1,060
Bad debts 4,620 Return (Purchase) 390
Salaries 16,000 Creditors 60,610
Octroi 1,000 Capital 75,000
Charity 250
Machinery 32,000
Debtors (Including a 60,000
dishonoured bill of ` 1,600)
Stock 81,600
Purchases 2,60,590
Repairs 3,350
Interest on loan 1,200
Sales tax 1,600
Insurance 2,000
Rent 4,000
5,38,060 5,38,060
Ch-09.indd 354 9/13/2022 5:00:28 PM

Adjustments
1. Wages include ` 4,000 for erection of new machinery on April 01, 2016.
2. Provide 5% depreciation on furniture.
3. Salaries unpaid `1,600.
4. Closing stock ` 81,850.
5. Create a provision at 5% on debtors.
6. Half the amount of bill is recoverable.
7. Rent is paid up to July 30, 2017.
8. Insurance unexpired ` 600.
Books of Fair Brothers Ltd.

Dr. Cr.

` `
Purchases 2,60,590 Less Sales return (4,800) 3,56,200
Less Purchases return (390) 2,60,200 Closing stock 81,850
Wages 45,050
Less Prepaid wages (4,000) 41,050
including erection of
machines
Octroi 1,000
4,38,050 4,38,050

Add Outstanding salary 1,600 17,600 Discount received 1,060
Repairs 3,350
Bad debts 4,620
Add New provision 2,960 8,380
Interest on loan 1,200
Add Outstanding interest 2,400 3,600
Sales tax 1,600
Insurance 2,000
Less Prepaid insurance (600) 1,400
Charity 250
Rent 4,000
Less Prepaid rent 1,000 3,000
Depreciation on machinery 1,800
capital account)
55,260 55,260
Ch-09.indd 355 9/13/2022 5:00:28 PM

356 Accountancy

` `
Creditors 60,610 Cash 20,000
Outstanding salaries 1,600 Debtors 60,000
L oan 40,000 Less Bad debts (800)
Outstanding interest 2,400 Less Provision 2,960 56,240
Capital 75,000 Prepaid rent 1,000
Add Net profit 14,280 89,280 Unexpired insurance 600
Machinery 32,000
Add Erection 4,000
Wages 36,000
1,93,890 1,93,890
Illustration 8
From the following balance extracted from the books of of M/s Hariharan Brother, you
are require to prepare the trading and profit and loss account and a balance sheet as on
December 31, 2017.
Debit balance Amount Credit balance Amount
` `
Opening stock 16,000 Capital 1,00,000
Return inwards 3,000 Return outwards 800
Carriage inwards 2,400 Apprenticeship premium 3,000
Carriage outwards 5,000 Bills payable 5,000
Wages 6,600 Creditors 31,600
S alaries 11,000
Rent 2,200
Freight and Dock 4,800
Fire Insurance premium 1,800
Bad debts 4,200
Discount 1,000
Printing and Stationery 500
Rates and Taxes 700
Travelling expenses 300
Trade expenses 400
Business premises 1,10,000
Furniture 5,000
Debtors 40,000
Machine 9,000
Loan 10,000
Investment 6,000
Cash in hand 500
Cash at bank 7,000
Proprietor’s withdrawal 6,000
3,00,400 3,00,400
Ch-09.indd 356 9/13/2022 5:00:28 PM

Adjustments
1. Closing stock` 14,000.
2. Wages outstanding ` 600, Salaries Outstanding ` 1,000, Rent outstanding ` 200.
3. Fire Insurance premium includes ` 1,200 paid in July 01, 2016 to run for one year
from July 01, 2016 to June 30, 2017.
4. Apprenticeship Premium is for three years paid in advance on January 01, 2016.
5. Stationery bill for ` 60 remain unpaid.
6. Depreciation on Premises @ 5%, furniture @ 10%, Machinery @ 10%.
7. Interest on loan given accrued for one year @ 7%.
8. Interest on investment @ 5% for half year to December 31, 2016 has accrued.
9. Interest on capital to be allowed at 5% for one year.
10. Interest on drawings to be charged to him ascertained for the year ` 160.
Solution
Books of Hariharan Bros.
Trading and Profit and Loss Account for the year ended December 31, 2017
Dr. Cr.
` `
Purchases 40,000 Less Sales return (3,000) 1,57,000
Less purchases return (800) 39,200 Closing stock 14,000
Wages 6,600
Add Outstanding Wages 600 7,200
Freight and Dock 4,800
Gross profit c/d 1,01,400
1,71,000 1,71,000
Salaries 11,000 Gross profit b/d 1,01,400
Add Outstanding salary 1,000 12,000 Apprenticeship 3,000
Carriage outwords 5,000 premium
Rates and Taxes 700 Less Advance premium(2,000) 1,000
Printing and Stationery 500 Accrued interest on loan 700
Add Outstanding bill 60 560 Interest on drawings 160
Trade expenses 400 Accrued interest on 150
Travelling expenses 300 investment
Fire insurance 1,800
Bad debts 4,200
Rent 2,200
Add Outstanding rent 200 2,400
Interest on capital 5,000
Depreciation on premises 5,500
Depreciation on machinery 900
Discount 1,000
capital account)
1,03,410 1,03,410
Ch-09.indd 357 9/13/2022 5:00:28 PM

358 Accountancy
Balance Sheet as at December 31, 2017

` `
Capital 1,00,000 Premises 1,10,000
Add Interest on capital 5,000 Less Depreciation (5,500) 1,04,500
1,68,750 Furniture 4,500
Less drawings (6,000)
1,62,750 Machinery 8,100
Less Interest on drawings (160) 1,62,590
Creditors 31,600 Debtors 40,000
Bills payable 5,000 Bills receivable 7,000
Outstanding wages 600 Cash in hand 500
Outstanding salaries 1,000 Cash at bank 7,000
Outstanding rent 200 Loan 10,000
Outstanding stationery 60 Add accrued interest 700 10,700
Apprenticeship premium (advance) 2,000 Investments 6,000
Add accrued interest 150 6,150
Pre-paid insurance 600
2,03,050 2,03,050
Illustration 9
The following balances have been extracted from the trial balance of M/s Kolkata Ltd. You
are required to prepare the trading and profit and loss account on dated March 31, 2017.
Also prepare balance sheet on that date.
` `
Opening stock 6,000 Capital 20,000
Furniture 1,200 Sales 41,300
Drawings 2,800 Purchases return 4,000
Cash in hand 3,000 Bank overdraft 4,000
Purchases 24,000 Bad debts provision 400
Sales return 2,000 Creditors 5,000
Establishment expenses 4,400 Commission 100
Bad debts 1,000 Bills payable 5,000
Debtors 10,000 Apprenticeship premium 500
Carriage 1,000
Bank deposits 8,000
Wages 1,000
Trade expenses 500
Bank charges 400
Salaries 2,000
Insurance 1,500
Postage and Telegram 500
Rent, Rates and Taxes 2,000
Coal, Gas, Water 2,000
80,300 80,300
Ch-09.indd 358 9/13/2022 5:00:29 PM

Adjustments
1. Outstanding salaries ` 100. Rent and taxes ` 200, Wages ` 100.
2. Unexpired insurance ` 500.
3. Commission is received in advances ` 50.
4. Interest ` 500 is to be received on bank deposits.
5. Interest on bank overdraft ` 750.
6. Depreciation on furniture @ 10%.
7. Closing stock` 9,000.
8. Further bad debts ` 200 New provision @ 5% on debtors.
9. Apprenticeship premium received in advance ` 100.
10. Interest on drawings @ 6%.
Solution
Books of Kolkata Ltd.
Trading and Profit and Loss Account for the year ended as at March 31, 2017
Dr. Cr.
Expenses /Losses Amount Revenue/Gains Amount
` `
Opening stock 6,000 Sales 41300
Purchases 24,000 Less sales return (2,000) 39,300
Less purchases return (4,000) 20,000 Closing stock 9,000
Wages 1,000
Coal, Gas, Water 2,000
48,300 48,300
Establishment expenses 4,400 Gross profit b/d 19,200
Carriage 1,000 Commission 100
Trade expenses 500 Less Advance commission(50) 50
Bank charges 400 Accrued interest on 500
deposits
General expenses 1,000 Apprenticeship premium500
Salaries 2,000 Less Advance received 100 400
Add Outstanding salary 100 2,100 Interest on drawings 168
I nsurance 1,500
Postage and Telegram 500
Rent, rates and Taxes 2,200
Interest on bank overdraft 750
Bad debts 1,000
Add New provision 490
1,690
Less Old provision (400) 1,290
capital account)
20,318 20,318
Ch-09.indd 359 9/13/2022 5:00:29 PM

360 Accountancy

` `
Capital 2,00,00 Insurance prepaid 500
Net profit 5,058 Bank deposits 8,000
25,058
Less Drawings (2,800) Add outstanding interest500 8,500
22,258
Less Interest on drawings (168) 22,090 Furniture 1,080
Creditors 5,000 Cash in hand 3,000
Commission received in advance 50 Debtors 10,000
A
pprenticeship premium 100 Less Further (200)
bad debts 9
,800
Outstanding wages 100 Less Provision for (490) 9,310
doubtful debts
Outstanding salaries 100 Bills receivable 6,000
Outstanding rent, 200
rates, taxes Closing stock 9,000
Bank overdraft 4,000
Add Outstanding interest 750 4,750
Bills payable 5,000
37,390 37,390
Illustration 10
Prepare the trading and profit and loss account of M/s Roni Plastic Ltd. from the following
trial balance and a balance sheet as at March 31, 2017.
` `
Drawings 6,000 Creditors 16,802
Sundry debtors 38,200 Capital 60,000
Carriage outwards 2,808 Loan on mortgage 17,000
Establishment expenses 16,194 Bad debts provision 1,420
Interest on loan 400 Sales 2,22,486
Cash in hand 6,100 Purchases return 2,692
Stock 11,678 Discount 880
Motor car 18,000 Bills payable 5,428
Cash at bank 9,110 Rent received 500
Land and Buildings 24,000
Bad debts 1,250
Purchases 1,34,916
Sales return 15,642
Advertisement 4,528
Carriage inward 7,858
Rates, taxes, insurance 7,782
3,27,208 3,27,208
Ch-09.indd 360 9/13/2022 5:00:29 PM

Adjustments
1. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%.
2. Interest on loan is @ 5% taken on April 01, 2016.
3. Goods costing Rs1,200 were sent to a customer on sale on return basis for` 1,400
on March 30, 2017 and has been recorded in the books as actual sales.
4. Salaries amounting to ` 1,400 and Rates amounting to ` 800 are due.
5. The bad debts provision is to be brought up to @ 5% on sundry debtors.
6. Closing stock was ` 13,700.
7. Goods costing ` 1,000 were taken away by the proprietor for his personal use but
not entry has been made in the books of account.
8. Insurance pre-paid ` 350.
9. Provide the manager’s commission at @ 5% on Net profit after charging such commission.
Solution
Books of Roni’s Plastic Ltd.
Trading and Profit and Loss Account for the year ended March 31, 2017
Dr. Cr.
` `
Purchases 1,34,916 Less Sales 15,642
return 2,06,844
Less Purchases return 2,692 Less Return basis (1,400) 2,05,444
1,32,224
Less Goods withdrawn (1,000) 1,31,224 Closing stock 13,700
2,19,144 2,19,144
Outstanding salaries 1,400 Gross profit b/d 68,384
Carriage outwards 2,808 Discount 880
Establishment expenses 16,194 Rent 500
Bad debts 1,250
3,090
Rates and Taxes 7,782
Less Prepaid (350)
7,432
Advertisement 4,528
Interest on loan 400
Add Outstanding Interest 450 850
Depreciation on :
L
and and Building 1,200
Motor car 2,700 3,900
Manager commission 1,010
capital account) 69,764 69,764
Ch-09.indd 361 9/13/2022 5:00:29 PM

362 Accountancy

` `
Capital 60,000 Cash in hand 6,100

80,194 Cash at bank 9,110
Less Drawings (6,000)
(74,194) Bills receivable 13,764
Less Goods withdrawn 1,000 73,194 Debtors 38,200
loan 17,000 Less sales (1,400)
return basis 36,800
Add interest 450 17,450 Less New provisions (1,840) 34,960
Bills payable 5,428 Land and Building 24,000
Creditors 16,802 Motor car 18,000
Outstanding Salaries 1,400 Prepaid insurance 350
Outstanding Rates Taxes 800 Closing stock 13,700
Manager commission 1,010
1,16,084 1,16,084
Do it yourself
1. From the following Trial Balance of M/s Karan on March 31, 2017, prepare
a Trading and Profit and Loss Account and a Balance Sheet:
Particulars Dr. (`) Cr. (`)
Creditors/Debtors 2,05,000 96,000
Bills Payable/Bills Receivables 10,000 9,600
15% Loan — 50,000
Sales/Purchases 2,80,000 12,00,000
Discount 4,000 3,000
Bad Debt Recovered/Bad Debt 5,000 14,000
Interest on Investments — 6,000
Interest on Loan 8,000 4,000
Vehicles 6,50,000 —
Stock 3,00,000 —
10% Investments (Purchased on 30 September, 2016)
th
1,80,000 —
Cash in hand 20,000 —
Cash at bank 37,000 —
Ch-09.indd 362 9/13/2022 5:00:29 PM

Capital /Drawings 9,000 4,50,000

Carriage on Purchases 1,600 —
Carriage on sales 4,400 —
Primary Packing Expenses 2,000 —
Rent 3,000 7,000
Insurance 3,600 —
Office & Administrative Expenses 4,000 —
Discount 2,000 3,000
10% Loan 60,000 —
Delivery Expenses 4,000 —
Selling and Distribution Expenses 10,000 —
Income Tax 2,000 —
Outstanding Salary — 1,000
Sales Tax Collected — 3,000
Apprenticeship Premium — 6,000
Returns 1,000 4,000
Live Stock 53,000 —
Commission 10,000 12,000
18,68,600 18,68,600
(I) Additional Information

(a) The cost of closing stock was ` 50,000 but the market value was `
40,000.
(b) Rent is due but not yet paid for March 2017 ` 500.
(c) Insurance carried forward ` 900.
(d) 1/3 of the commission received is in respect of work to be done in next
year and commission paid represents only 1/4 of the actual commission
to be paid during the year.
(e) Vehicles were valued at 90% of the book value.
(f) The Horse worth ` 30,000 was donated to a charitable organization.
(II) Name the accounting concept followed while treating the adjustment (a),
(b) and (d) above?
Ch-09.indd 363 9/13/2022 5:00:29 PM

364 Accountancy
2. The following balances were extracted from the books of Avika Enterprises
on 31st March 2017.
Capital — 24,500
Drawings 2,000 —
General Expenses 2,500 —
Buildings 21,000 —
Machinery 9,340 —
Stock (1.4.2016) 16,200 —
Power 2,240 —
Taxes and Insurance 1,315 —
Wages 7,200 —
Debtors and Creditors 6,280 2,500
Charity 105 —
Bad debts 550 —
Bank Overdraft — 11,180
Sales and Purchases 13,500 65,360
Stock (31.03.2017) 23,500 —
Motor Vehicles 2,000 —
Motor Vehicle expenses 500 —
Provision for doubtful debts — 900
Commission — 1,320
Trade expenses 1,280 —
Bills payable — 3,850
Cash 100 —
Total 1,09,610 1,09,610
You are required to :

(i) Prepare final accounts for the year ended March 31, 2017 after giving
effect to the following adjustments:
(a) 1/5th of General expenses and Taxes & Insurance to be charged to
factory and the balance to the office.
(b) Write off a further Bad debts of ` 160 and maintain the provision for
doubtful debts at 5% and create a provision for discount on Debtors
at 10%.
(c) Depreciate Machinery at 10% and Motor Vehicles by ` 240
(d) Provide ` 700 for interest on Bank Overdraft to be paid.
(e) ` 50 is to be carried forward to next year out of Insurance.
(f) Provide for Manager’s Commission at 10% on the Net Profit after
charging such commission.
(ii) Name the accounting concepts which are followed while treating the
adjustment (a), (b) and (d) above?
Ch-09.indd 364 9/13/2022 5:00:29 PM

3. The following balances were extracted from the books of Anushka Enterprises
on March 31, 2017.
Particulars Amount (`)
Creditors 2,00,000
Loan from SBI 2,00,000
Sales 12,30,000
Debtors 2,00,000
Dividend Received on Shares 20,000
Bad Debt 2,000
Bad Debt Recovered 12,000
Bills Receivables 1,50,000
Interest on Loan 50,000
Goodwill 4,00,000
Purchases 2,10,000
Stock (1.4.2016) 1,00,000
Cash at Bank 3,00,000
Factory Repairs 40,000
Capital 7,24,000
Audit Fees 6,000
Petty Expenses 4,000
Salary 70,000
Life Insurance Premium 15,000
Premises 4,00,000
Insurance 25,000
Sales Returns 12,000
Employees Provident Fund 60,000
Provision for Doubtful Debts 75,000
Delivery Expenses 8,000
Dock Charges (Outward) 6,000
Packing Charges 17,000
Advance Salary 30,000
Warehouse Insurance 13,000
Loss in Exchange 9,000
Bank Charges 5,000
Bonus from Suppliers 3,45,000
Purchases Returns 10,000
Machinery 8,00,000
Discounting of Bills of Exchange 1,000
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366 Accountancy

(i) Prepare final accounts for the year ended March 31, 2017 after giving
(a) Insurance is due but not yet paid for 31 March 2017 ` 500.
(b) Salary Unexpired ` 900.
(c) Write off a further Bad debts ` 2,000 and maintain the provision for
bad debts at 5% on Debtors.
(d) Machinery is to be valued at 90% less than the book value.
(e) Goods kept in warehouse worth ` 10,0000 were used for staff welfare.
(f) Half of the Bills Receivable were irrecoverable.
(h) Closing Stock is ` 40,000
(ii) Name the accounting concepts which will be followed while treating the
adjustment (a), (b), (c) and (d) above?
4. The following balances were extracted from the books of Ankita Enterprises
on March 31, 2017.
Capital — 1,92,680
Cash — 60
Purchases 17,980 —
Sales — 22,120
Bank 1,770 —
Plant 450 —
Freehold Land 3,000 —
Heating and Lighting 130 —
Bills Receivables — 1,650
Return Inwards — 60
Salaries 2,150 —
Creditors — 63,780
Debtors 11,400 —
Stock (as on 01.04.2016) 6,000 —
Printing 450 —
Bills Payable 3,750 —
Taxes 380 —
Discount Received 890 —
Commission (Dr.) — 800
Trucks 25,000 —
Furniture — 12,000
Wages 2,00,000 —
Drawings — 340
Returns Outward 400 —
2,73,750 2,93,490
Ch-09.indd 366 9/13/2022 5:00:29 PM


(i) Redraft the Trial Balance.
(ii) Prepare final accounts for the year ended March 31, 2017 after giving
(a) Taxes are paid for 10 months only.
(b) Creditors worth ` 780 have accepted bills payables.
(c) Depreciate furniture by 10%.
(d) Trucks were depreciated to the extent of ` 21,000.
(e) Wages includes ` 2,000 for the making of Furniture.
(f) Closing Stock is of ` 20,000.
(g) Provide for Manager’s Commission at 10% on the Net Profit before
(h) Land was acquired on 1st April, 2016 by paying a claim at 50% less
than market value to the owner.
(iii) Name the accounting principles which will be followed while treating the
adjustment (a), (c) and (e) above?
(Correct total of Trial Balance ` 2,83,620)
Key Terms Introduced in the Chapter

• Outstanding /Accrued expenses • Prepaid/Unexpired expenses
• Accrued Incomes • Income received in advance
• Depreciation • Bad Debts
• Provision for doubtful debts • Provision for discount on debtors
• Managers Commission • Interest on Capital
Summary with Reference to Learning Objectives

1. Need for adjustments : For the preparation of financial statements, it is necessary
that all the adjustments arising out of the accrual basis of accounting are made
at the end of the accounting period. Another important consideration in the
preparation of final accounts with adjustments, is the distinction between capital
and revenue items. Entries which are recorded to give effect to these adjustments
are known as adjusting entries.
2. Outstanding expenses : At the end of the accounting period sometimes a business
enterprises is left with some unpaid expenses due to one reason or another. Such
expenses are termed as outstanding expenses.
Ch-09.indd 367 9/13/2022 5:00:29 PM

368 Accountancy
3. Prepaid expenses : At the end of the accounting year, it is found that the benefits
of some expenses have not been fully received; a portion of total benefits would
be received in the next accounting year. That portion of the expense, the benefit
of which will be received during the next accounting period is known as ‘prepaid
expenses’.
4. Accrued Income : These are certain items is received by a business enterprise
but the whole amount of it does not belong to the next period. Such portion
of income which belongs to the next accounting period is income received in
advance and is known as “unearned income”.
5. Depreciation : Depreciation is the decline in the value of an asset an account
of wear and tear or passage of time or with. It actually amounts to writing off
a portion of the cost of an asset which has been used in the business for the
purpose of earning profits. In the balance sheet, the asset is shown at loss
minus the amount of depreciation.
6. Provisions for bad and doubtful debts : It is a normal feature of business
operations that some debts prove irrecoverable which means that the amount
to the realised from them becomes had to view of this. An attempt is made to
bring in a certain element of certainty in the amount in respect of bad debts
charged every year against incomes.
Questions for Practice

Short Answers
1. Why is it necessary to record the adjusting entries in the preparation of final
accounts?
2. What is meant by closing stock? Show its treatment in final accounts?
3. State the meaning of:
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
4. Give the Performa of income statement and balance in vertical form.
5. Why is it necessary to create a provision for doubtful debts at the time of
preparation of final accounts?
6. What adjusting entries would you record for the following :
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Manager’s commission
7. What is meant by provision for discount on debtors?
8. Give the journal entries for the following adjustments :
(a) Outstanding salary ` 3,500.
(b) Rent unpaid for one month at ` 6,000 per annum.
(c) Insurance prepaid for a quarter at ` 16,000 per annum.
(d) Purchase of furniture costing ` 7,000 entered in the purchases book.
Ch-09.indd 368 9/13/2022 5:00:29 PM

Long Answers
1. What are adjusting entries? Why are they necessary for preparing final
accounts?
2. What is meant by provision for doubtful debts? How are the relevant accounts
prepared and what journal entries are recorded in final accounts? How is the
amount for provision for doubtful debts calculated?
3. Show the treatment of prepaid expenses depreciation, closing stock at the
time of preparation of final accounts when:
(a) When given inside the trial balance?
(b) When given outside the trial balance?
Numerical Questions
1. Prepare a trading and profit and loss account for the year ending March 31,
2017. from the balances extracted of M/s Rahul Sons. Also prepare a balance
sheet at the end of the year.

` `
Stock 50,000 Sales 1,80,000

Wages 3,000 Purchases return 2,000
Salary 8,000 Discount received 500
Purchases 1,75,000 Provision for doubtful debts 2,500
Sales return 3,000 Capital 3,00,000
Sundry Debtors 82,000 Bills payable 22,000
Discount allowed 1,000 Commission received 4,000
Insurance 3,200 Rent 6,000
Rent Rates and Taxes 4,300 Loan 34,800
Fixtures and fittings 20,000
Bad debts 2,000
Drawings 32,000
Repair and renewals 1,600
Postage 300
Telegram expenses 200
Legal fees 500
Building 1,10,000
5,51,800 5,51,800
Adjustments
1. Commission received in advance `1,000.
2. Rent receivable ` 2,000.
3. Salary outstanding ` 1,000 and insurance prepaid ` 800.
Ch-09.indd 369 9/13/2022 5:00:29 PM

370 Accountancy
4. Further bad debts ` 1,000 and provision for doubtful debts @ 5% on

debtors and discount on debtors @ 2%.
5. Closing stock ` 32,000.
6. Depreciation on building @ 6% p.a.
(Ans : Gross loss `17,000 ; Net loss `43,189 ; Total balance sheet `2,83,611)
2. Prepare a trading and profit and loss account of M/s Green Club Ltd. for the
year ending March 31, 2017.from the following figures taken from his trial
balance :

` `
Purchases 1,25,000 Purchase return 6,000
Return inwards 25,000 Creditors 10,000
Postage and Telegram 600 Bills payable 20,000
Salary 12,300 Discount 1,000
Wages 3,000 Provision for bad debts 4,500
Rent and Rates 1,000 Interest received 5,400
Packing and Transport 500 Capital 75,000
General expense 400
Insurance 4,000
Debtors 50,000
Cash in hand 20,000
Cash at bank 40,000
Machinery 20,000
Lighting and Heating 5,000
Discount 3,500
Bad debts 3,500
Investment 23,100
3,71,900 3,71,900
Adjustments
1. Depreciation charged on machinery @ 5% p.a.
2. Further bad debts `1,500, discount on debtors @ 5% and make a
provision on debtors @ 6%.
3. Wages prepaid `1,000.
4. Interest on investment @ 5% p.a.
5. Closing stock 10,000.
(Ans. : Gross Profit `79.000 ; Net Profit `52,565 ; Total Balance Sheet
`1,57,565).
Ch-09.indd 370 9/13/2022 5:00:29 PM

3. The following balances has been extracted from the trial of M/s Runway Shine
Ltd. Prepare a trading and profit and loss account and a balance sheet as
on March 31, 2017.

` `
urchases
P 1,50,000 Sales 2,50,000
Opening stock 50,000 Return outwards 4,500
Return inwards 2,000 Interest received 3,500
Carriage inwards 4,500 Discount received 400
Cash in hand 77,800 Creditors 1,25,000
Cash at bank 60,800 Bill payable 6,040
Wages 2,400 Capital 1,00,000
Printing and Stationery 4,500
Discount 400
Bad debts 1,500
I nsurance 2,500
Investment 32,000
Debtors 53,000
Postage and Telegraph 400
Commission 200
I nterest 1,000
R epair 440
Lighting Charges 500
Telephone charges 100
Carriage outward 400
Motor car 25,000
4,89,440 4,89,440
Adjustments
1. Further bad debts ` 1,000. Discount on debtors ` 500 and make a
provision on debtors @ 5%.
2. Interest received on investment @ 5%.
3. Wages and interest outstanding ` 100 and ` 200 respectely.
4. Depreciation charged on motor car @ 5% p.a.
5. Closing Stock ` 32,500.
(Ans. : Gross profit ` 78,000 ; Net profit ` 66,010, Total balance sheet
` 2,97,350).
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372 Accountancy
4. From the following Trial Balance you are required to prepare trading and profit
and loss account for the year ending March 31, 2017 and Balance Sheet on
that date.
Particulars Amount Particulars Amount

` `

Furniture 16,000 Creditors 72,500
Purchases 5,55,300 Bank Overdraft 50,000
CarriageInwards 4,700 Provision for bad and 2,100
Bad debts 1,800 doubtful debts
Wages 52,000 Discount 500
Debtors 80,000 Capital 2,00,000
Sales Return 15,000 Purchases Return 20,000
Rent 24,000
Miscellaneous Expenses 3,400
Salaries 68,000
Cash 8,900
Drawings 14,000
Buildings 1,60,000
Advertising 10,000
Interest on Bank Overdraft 7,000

10,45,100 10,45,100
Adjustments
1. Closing stock valued at ` 36,000.
2. Private purchases amounting to ` 5000 debited to purchases account.
3. Provision for doubtful debts @ 5% on debtors.
4. Sign board costing ` 4,000 includes in advertising.
5. Depreciate furniture by 10%.
(Ans : Gross Profit `1,09,000; Net loss ` 4,600; Total balance sheet `2,98,900).
Ch-09.indd 372 9/13/2022 5:00:29 PM

5. From the following information prepare trading and profit and loss account
of M/s Indian sports house for the year ending March 31, 2017.

` `
Drawings 20,000 Capital 2,00,000

Sundry debtors 80,000 Return outwards 2,000
Bad debts 1,000 Bank overdraft 12,000
Trade Expenses 2,400 Provision for bad debts 4,000
Printing and Stationery 2,000 Sundry creditors 60,000
Rent Rates and Taxes 5,000 Bills payable 15,400
Feright 4,000 Sales 2,76,000
Return inwards 7,000
Purchases 1,80,000
Furniture and Fixture 20,000
Plant and Machinery 1,00,000
Wages 10,000
Cash in hand 6,000
Discount allowed 2,000
Investments 40,000
Motor car 51,000
5,69,400 5,69,400
Adjustments
1. Closing stock was `45,000.
2. Provision for doubtful debts is to be maintained @ 2% on debtors.
3. Depreciation charged on : furniture and fixture @ 5%, plant and
Machinery @ 6% and motor car @ 10%.
4. A Machine of `30,000 was purchased on October 01, 2016.
5. The manager is entitle to a commission of @ 10% of the net profit after
(Ans. : Gross profit `1,01,000 ; Net profit `68,909 ; Total balance sheet
` 3,43,200 ; Manager’s commission `6,891).
Ch-09.indd 373 9/13/2022 5:00:29 PM

374 Accountancy
6. Prepare the trading and profit and loss account and a balance sheet of M/s Shine
Ltd. from the following particulars.

` `
Sundry debtors 1,00,000 Bills payable 85,550

Bad debts 3,000 Sundry creditors 25,000
Trade expenses 2,500 Provision for bad debts 1,500
Printing and Stationary 5,000 Return outwards 4,500
Rent, Rates and Taxes 3,450 Capital 2,50,000
Freight 2,250 Discount received 3,500
Sales return 6,000 Interest received 11,260
Motor car 25,000 Sales 1,00,000
Furniture and Fixture 15,500
Purchases 75,000
Drawings 13,560
Investments 65,500
Cash in hand 36,000
Cash in bank 53,000
4,81,310 4,81,310
Adjustments
1. Closing stock was valued ` 35,000.

2. Depreciation charged on furniture and fixture @ 5%.
3. Further bad debts ` 1,000. Make a provision for bad debts @ 5% on sundry
debtors.
4. Depreciation charged on motor car @ 10%.
5. Interest on drawing @ 6%.
6. Rent, rates and taxes was outstanding `200.
7. Discount on debtors 2%.
(Ans. : Gross loss Rs,17,050 ; Net loss `27,482 ; Total balance sheet
` 3,18,894).
Ch-09.indd 374 9/13/2022 5:00:29 PM

7. Following balances have been extracted from the trial balance of M/s Keshav
Electronics Ltd. You are required to prepare the trading and profit and loss
account and a balance sheet as on March 31, 2017.

` `
pening stock 2,26,000

O Sales 6,80,000
Purchases 4,40,000 Return outwards 15,000
Drawings 75,000 Creditors 50,000
Buildings 1,00,000 Bills payable 63,700
Motor van 30,000 Interest receivced 20,000
Freight inwards 3,400 Capital 3,50,000
Sales return 10,000
Trade expense 3,300
Heat and Power 8,000
Salary and Wages 5,000
Legal expense 3,000
Postage and Telegram 1,000
Bad debts 6,500
Cash in hand 79,000
Cash at bank 98,000
Investments 40,000
I nsurance 3,500
Machinery 22,000
11,78,700 11,78,700
The following additional information is available :

1.
Stock on March 31, 2017 was ` 30,000.
2.
Depreciation is to be charged on building at 5% and motor van at 10%.
3.
Provision for doubtful debts is to be maintained at 5% on Sundry Debtors.
4.
Unexpired insurance was ` 600.
5.
The Manager is entitled to a commissiion @ 5% on net profit after charging
such commission.
(Ans. : Gross profit `,37,600 ; Net profit ` 25,381 ; Total balance sheet
`4,15,350 ; Manager’s commission `1,269).
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376 Accountancy
8. From the following balances extracted from the books of Raga Ltd. prepare a
trading and profit and loss account for the year ended March 31, 2017 and
a balance sheet as on that date.

` `
Drawings 20,000 Sales 2,20,000
Land and Buildings 12,000 Capital 1,01,110
Plant and Machinery 40,000 Discount 1,260
Carriage inwards 100 Apprentice premium 5,230
Wages 500 Bills payable 1,28,870
Salary 2,000 Purchases return 10,000
Sales return 200
Bank charges 200
Coal, Gas and Water 1,200
p urchases 1,50,000
Trade Expenses 3,800
Stock (Opening) 76,800
Cash at bank 50,000
Rates and Taxes 870
Cash in hand 30,000
4,66,470 4,66,470
The additional information is as under:

1. Closing stock was valued at the end of the year `, 20,000.
2. Depreciation on plant and machinery charged at 5% and land and
building at 10%.
3. Discount on debtors at 3%.
4. Make a provision at 5% on debtors for doubtful debts.
5. Salary outstanding was `100 and Wages prepaid was ` 40.
6. The manager is entitled a commission of 5% on net profit after charging
such commission.
(Ans. : Gross profit `,21,240 ; Net profit `12,664 ; Total balance sheet
` 2,23,377 ; Manager’s commission `633).
Ch-09.indd 376 9/13/2022 5:00:29 PM

9. From the following balances of M/s Jyoti Exports, prepare trading and profit
and loss account for the year ended March 31, 2017 and balance sheet as
on this date.
Account Title Debit Account Title Credit

Amount Amount
` `
Sundry debtors 9,600 Sundry creditors 2,500

Opening stock 22,800 Sales 72,670
Purchases 34,800 Purchases returns 2,430
Carriage inwards 450 Bills payable 15,600
Wages 1,770 Capital 42,000
Office rent 820
Insurance 1,440
Factory rent 390
Cleaning charges 940
Salary 1,590
Building 24,000
Cash in hand 2,160
Gas and Water 240
Octroi 60
Furniture 20,540
Patents 10,000
1,35,200 1,35,200
Closing stock `10,000.

1. To provision for doubtful debts is to be maintained at 5 per cent on sundry
debtors.
2. Wages amounting to ` 500 and salary amounting to ` 350 are outstanding.
3. Factory rent prepaid ` 100.
4. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.
5. Outstanding insurance `100.
(Ans : Gross profit `23,250 ; Net profit `15,895 ; Total balance Sheet
` 76,945).
Ch-09.indd 377 9/13/2022 5:00:29 PM

378 Accountancy
10. The following balances have been extracted from the books of M/s Green
House for the year ended March 31, 2017, prepare trading and profit and
loss account and balance sheet as on this date.

` `
Purchases 80,000 Capital 2,10,000
Bank balance 11,000 Bills payable 6,500
Wages 34,000 Sales 2,00,000
Debtors 70,300 Creditors 50,000
Cash in hand 1,200 Return outwards 4,000
Legal expenses 4,000
Building 60,000
Machinery 120,000
Office expenses 3,000
Gas and fuel 2,700
Freight and Carriage 3,500
Factory lighting 5,000
Office furniture 5,000
Patent right 18,800
4,70,500 4,70,500
Adjustments :
(a) Machinery is depreciated at 10% and buildings depreciated at 6%.
(b) Interest on capital @ 4%.
(c) Outstanding wages ` 50.
(d) Closing stock ` 50,000.
(Ans : Gross profit ` 83,750 ; Net Profit ` 52,750 ; Total balance sheet
` 3,27,700).
Ch-09.indd 378 9/13/2022 5:00:29 PM

11. From the following balances extracted from the book of M/s Manju Chawla
on March 31, 2017. You are requested to prepare the trading and profit and
loss account and a balance sheet as on this date.
Account Title Amount Amount

` `
Purchases and Sales 40,000 80,000
Returns 200 600
Wages 6,000
Dock and cleaning charges 4,000
Lighting 500
Misc. Income 6,000
Rent 2,000
Capital 40,000
Drawings 2,000
Cash 3,000
Investment 6,000
Patent 4,000
Land and Machinery 43,000
Donations and Charity 600
Sales tax collected 1,000
Furniture 11,300
1,36,600 1,36,600
Closing stock was ` 2,000.

(a) Interest on drawings @ 7% and interest on capital @ 5%.
(b) Land and Machinery is depreciated at 5%.
(c) Interest on investment @ 6%.
(d) Unexpired rent `100.
(e) Charge 5% depreciation on furniture.
(Ans. : Gross profit ` 21,900 ; Net profit ` 25,185 ; Total balance sheet
` 71,185).
Ch-09.indd 379 9/13/2022 5:00:29 PM

380 Accountancy
12. The following balances were extracted from the books of M/s Panchsheel
Garments on March 31, 2017.
Account Title Debit Account Title Credit

Amount Amount
` `
Purchases 67,600 Return outwards 3,200
Return Inwards 4,600 Discount 1,400
Carriage inwards 1,400 Bank overdraft 10,000
General expenses 2,400 Commission 1,800
Insurance 4,000 Creditors 16,000
Scooter expenses 200 Capital 50,000
Salary 8,800
Cash in hand 4,000
Scooter 8,000
Furniture 5,200
Buildings 65,000
Debtors 6,000
Wages 1,200
1,94,400 1,94,400
Prepare the trading and profit and loss account for the year ended March 31,
2017 and a balance sheet as on that date.
(a) Unexpired insurance ` 1,000.
(b) Salary due but not paid ` 1800.
(c) Wages outstanding ` 200.
(d) Interest on capital 5%.
(e) Scooter is depreciated @ 5%.
(f) Furniture is depreciated `@ 10%.
(g) Closing stock was ` 15,000.
(Ans.: Gross profit ` 39,200 ; Net profit ` 22,780 ; Total balance sheet
` 1,03,280}.
Ch-09.indd 380 9/13/2022 5:00:29 PM

13. Prepare the trading and profit and loss account and balance sheet of M/s
Control Device India on March 31, 2017 from the following balance as on
that date.
Account Title Debit Credit

Amount Amount
` `
Drawings and Capital 19,530 67,500
Purchase and Sales 45,000 1,12,500
Salary and Commission 25,470 1,575
Carriage 2,700
Furniture 6,750
Insurnace premium 2,700
Interest 7,425
Bank overdraft 24,660
Wages 11,215
Returns 2,385 1,440
Carriage outwards 1,485
Octroi 530
Investment 41,400
2,73,600 2,73,600
Closing stock was valued ` 20,000.

(a) Interest on capital @ 10%.
(b) Interest on drawings @ 5%.
(c) Wages outstanding ` 50.
(d) Outstanding salary ` 20.
(e) Provide a depreciation @ 5% on plant and machinery.
(f) Make a 5% provision on debtors.
(Ans.: Gross profit ` 29,760 ; Net loss ` 8,973 ; Total balance sheet `1,28,000)
14. The following balances appeared in the trial balance of M/s Kapil Traders as
on March 31, 2017
`
Bad debts 500
Ch-09.indd 381 9/13/2022 5:00:29 PM

382 Accountancy
The partners of the firm agreed to records the following adjustments in the books of
the Firm: Further bad debts `300. Maintain provision for bad debts 10%. Show the
following adjustments in the bad debts account, provision account, debtors account,
profit and loss account and balance sheet.
(Ans : Dr. Profit and Loss account `1,820)
15. Prepare the bad debts account, provision for account, profit and loss account and
balance sheet from the following information as on March 31, 2017
`
Debtors 80,000
Bad debts 2,000
Adjustments :
Bad debts `500 Provision on debtors @ 3%.
(Ans : Credit Profit and Loss account `115)
Checklist to Test Your Understanding
1. (c), 2. (d), 3. (b), 4. (a), 5. (d)
Ch-09.indd 382 9/13/2022 5:00:29 PM

APPENDIX
Description of Commonly Used Functions in Access

There are three types of functions that are used to set the Control Source property
of calculated controls and/or to form part of calculated field expression in SQL
statement. A brief description of the commonly used functions is below :
A-1. Domain Aggregate Functions

These functions are used to perform calculations based on values in a field of a table
or query. Criteria to select the set of records in the table or query that is desired to be
used for calculations may also be specified. The criteria, if not specified, imply that
all the records of the table or query specific to the field are used for computation.
All the domain aggregate functions use the same syntax as is given hereunder :
DFunction (“FldName”, “TblName” or “QryName”, “SrchCond”)
Wherein DFunction refers to a named domain aggregate function. A brief
description of its input arguments is given below:
FldName : It refers to the name of field that is to be searched in a table or query,
which is specified as an argument.
TblName (or QueryName) : It refers to the name of a table or query that contains
the field specified as second input argument.
SrchCond : It refers to the search condition on the basis of which the relevant
record is searched.
Some of the important domain aggregate functions have been described as
below :
(a) DLookup : This function is meant to look up information that is stored
in a table or query, which is not the underlying source of Access Form or
Report. It is used to set the Control Source property of a calculated control
to display data from other table or query. Consider the following example:
DLookup (“Name”, “Accounts”, “Code = ‘110001’”)
In the above example, this function has been applied to search the name of
account (in Accounts table) whose code is ‘110001’.
(b) DMax and DMin : These functions are used to retrieve respectively the
maximum and minimum values in the specified field. Consider the
following example :
DMin (“Amount”, “Vouchers”, “Debit = ‘711001’”)
Dmax (“Amount”, “Vouchers”, “Debit = ‘711001’”)
In the above examples, the amount of minimum purchase transaction and
maximum purchase transaction is retrieved and reported. It may also be
noted that ‘711001’ is the code of Purchase account in Accounts table
(c) DSum : This function computes and returns the sum of the values in the
specified field or expression. For Example, in a table : Sales that contains
Appendix.indd 383 9/13/2022 5:21:40 PM

384 Accountancy
ItemCode, Price and Quantity as fields, the total amount of sales may be
computed by using the DSum () function as follows :
DSum (“Price*Quantity”, “Sales”)
However, if the total sales is to computed for a particular item coded as
1678, the DSum () function shall be applied as follows :
DSum (“Price*Quantity”, “Sales”, “ItemCode = 1678”)
(d) DFirst and DLast : These functions are used to retrieve respectively the
values in the specified field from first and last physical records.
Consider the following application examples :
DFirst (“Name”, “Accounts”)
DLast (“Name”, “Accounts”)
In the above examples, the name first and last account that physically exists
in Accounts table is retrieved and reported.
(e) DCount : This function is meant to compute the number of records with
non-null values in the specified field. Consider the following application
example :
DCount (“*”, “Accounts”)
In the above example, The number of records in accounts table are counted
and reported by DCount () function.
A-2. SQL Aggregate Functions

The SQL aggregate functions have the functionality similar to that of domain
aggregate function. However, unlike domain aggregate functions, these functions
cannot be called directly into controls used in Forms and Reports of Access. These
functions are used in SQL statements that provide the underlying record source of
Forms and Reports. All these functions, when used require the GROUP BY clause
in SQL statement :
(a) Sum : This function is used to compute and return the sum of a set of values. For
Example, consider the following SQL statement that has been used in Chapter-V
to prepare the underlying information source of Trial Balance (Model-I.).
SELECT Debit As Code, SUM (Amount) AS Total
FROM VOUCHERS
GROUP BY Debit ;
In the above SQL statement, Sum () has been used to compute the total amount
by which the transacted accounts have beeen debited.
(b) Min and Max : These functions are used to retrieve respectively the minimum
and maximum of value set with respect to field or query expression. For Example,
the following SQL statement is capable of returning the amount of minimum
and maximum sales transaction in Model-I :
SELECT Min (Amount) As MinSales, Max (Amount) As MaxSales
FROM Vouchers
WHERE Credit = ‘811001’ ;
Appendix.indd 384 9/13/2022 5:21:40 PM

Appendix 385
It may be noted that the sales account that is coded as ‘811001’ is credited as
and when a sales transaction is recorded.
(c) Count : This function counts the number of records returned by a query. The
number of times a sales transaction has occurred and recorded in books of
accounts can be known by executing the following SQL statement.
SQL statement.
SELECT count (*)
FROM Vouchers
WHERE Credit = ‘811001’
In the above SQL statement, the Credit field stores the account code of sales
when a sales transaction occurs. The WHERE clause restricts the number of
records returned by the above SQL to those in which credit field has the account
code of sales. Accordingly, the count () function returns the count value of
records returned by the above SQL statement.
(d) First and Last : These functions are meant to retrieve the first and last record
of a value set pertaining to a field or query expression.
A-3. Other Functions

(a) IIF : The purpose of this function is to provide a value to the field from a mutually
exclusive set of values. Its syntax is as given below :
IIIF (<Condition>, Value-1, Value-2)
Wherein <Condition> refers to any logical expression in which a comparison is
made by using following comparison operators :
= equal to
<less than
>greater than
<= less than or equal to
>= greater than or equal to
The condition formed by the above comparison operators is evaluated to result
into TRUE or FALSE.
<Value-1> This value is returned by IIF() function to the field, if the condition
turns out to be TRUE
<Value-2> This value is returned by IIF() function to the field, if the condition
turns out to be FALSE
Example : Suppose a field Type is to return the string of characters “Debit”
when its value is 0 and “Credit” when its value is 1, IIF() function is used as
shown below :
IIF (Type = 0, “Debit”, “Credit”)
(b) Abs : The purpose of this function is to return absolute value, This function
receives a numeric value as its input argument and returns an absolute value.
Consider the following examples on use of Abs ( ) function :
When – 84 is given as input argument to Abs(– 84), it returns 84
When 84 is given as input argument to Abs(84), it returns 84
Appendix.indd 385 9/13/2022 5:21:40 PM

386 Accountancy
(c) Val : The purpose of this function is to return the numbers contained in a string
as a numeric value of appropriate type. Its Syntax is Val(string)
The string argument of the above Val( ) function is any valid string expression.
The Val( ) function stops reading the string at the first character that cannot be
recognised as number. For example, Val(“12431”) returns the value 12431 by
converting the enclosed string of numerals into value. However, Val (“12,431”)
returns the numeric value 12 because comma after 12 in the enclosed string
of characters in Val ( ) function is not recognised as number.
Appendix.indd 386 9/13/2022 5:21:40 PM

Note
Appendix.indd 387 9/13/2022 5:21:40 PM

Note
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318 Accountancy

I n chapter 8, you learnt about the preparation of

Ch-09.indd 318 9/13/2022 5:00:26 PM

Ch-09.indd 319 9/13/2022 5:00:26 PM

Trial Balance of Ankit as on March 31, 2017

Account Title­ Elements L.F. Debit Credit

Cash­ ­Assets­ 1,000­ ­

Total­ ­ 1,62,000­ 1,62,000­­

Additional Information : The stock on March 31, 2017 was ` 15,000.

Figure 9.1 : Showing the trial balance of Ankit

9.2 Closing Stock

Ch-09.indd 320 9/13/2022 5:00:26 PM

Trading and Profit and Loss Account of Ankit

Ch-09.indd 321 9/13/2022 5:00:26 PM

9.3 Outstanding Expenses

Ch-09.indd 322 9/13/2022 5:00:26 PM

Trading and Profit and Loss Account of Ankit

Balance Sheet of Ankit as at March 31, 2017

9.4 Prepaid Expenses

Ch-09.indd 323 9/13/2022 5:00:26 PM

Trading and Profit and Loss Account of Ankit

Ch-09.indd 324 9/13/2022 5:00:26 PM

Balance Sheet of Ankit as at March 31, 2017

Liabilities­ Amount­ Assets­ Amount­

Owners Funds­ ­ Non-Current Assets­ ­

9.5 Accrued Income

Ch-09.indd 325 9/13/2022 5:00:26 PM

Trading and Profit and Loss Account of Ankit

Purchases­ 75,000­ Sales­ 1,25,000­

Salaries 25,000­ Gross profit b/d­ 56,500­

Balance Sheet of Ankit as at March 31, 2017

Liabilities Amount­ Assets Amount­

Owners Funds­ ­ Non-Current Assets­

Ch-09.indd 326 9/13/2022 5:00:26 PM

9.6 Income Received in Advance

Balance Sheet of Ankit as at March 31, 2017

Liabilities­ Amount Assets­ Amount­

Ch-09.indd 327 9/13/2022 5:00:26 PM

Purchases­ 75,000­ Sales­ 1,25,000­

Salaries 25,000 ­ Gross profit b/d­ 56,500­

Ch-09.indd 328 9/13/2022 5:00:27 PM

Balance Sheet of Ankit

Liabilities­ Amount­ Assets­ Amount

Owners Funds­ ­ Non-Current Assets­

9.8 Bad Debts

Ch-09.indd 329 9/13/2022 5:00:27 PM

Balance Sheet of Ankit as at March 31, 2017

Liabilities­ Amount­ Assets­ Amount­

9.9 Provision for Bad and Doubtful Debts

Ch-09.indd 330 9/13/2022 5:00:27 PM

of this amount may not be realised in future. However, it is not possible to

Trading and Profit and Loss Account of Ankit

Expenses/Losses­ Amount­ Revenues/Gains­ Amount

Purchases­ 75,000­ Sales­ 1,25,000­

Ch-09.indd 331 9/13/2022 5:00:27 PM

Balance Sheet of Ankit as at March 31, 2017

Liabilities­ Amount­ Assets­ Amount­

Owners Funds­ ­ Non-Current Assets­

Ch-09.indd 332 9/13/2022 5:00:27 PM

In this case, the following journal entries will be recorded :

March (a) Bad debts A/c Dr. 1,000­ ­

(b) Provision for doubtful debts A/c Dr. 3,000­

Profit and Loss A/c Dr.­ 1,050

Account Title Elements L.F. Debit Credit

Cash Assets 1,000

Total 1,62,000 1,62,000

Liabilities Amount Assets Amount

Owners Funds Non-Current Assets

Purchases 75,000 Sales 1,25,000

Salaries 25,000 Gross profit b/d 56,500

Liabilities Amount Assets Amount

Owners Funds Non-Current Assets

Liabilities Amount Assets Amount

Purchases 75,000 Sales 1,25,000

Salaries 25,000 Gross profit b/d 56,500

Liabilities Amount Assets Amount

Owners Funds Non-Current Assets

Liabilities Amount Assets Amount

Expenses/Losses Amount Revenues/Gains Amount

Purchases 75,000 Sales 1,25,000

Liabilities Amount Assets Amount

Owners Funds Non-Current Assets

March (a) Bad debts A/c Dr. 1,000

(b) Provision for doubtful debts A/c Dr. 3,000

Profit and Loss A/c Dr. 1,050

Expenses/Losses Amount Revenues/Gains Amount

Purchases 75,000 Sales 1,25,000

Owners Funds Non-Current Assets

Expenses/Losses Amount Revenues/Gains Amount

Purchases 75,000 Sales 1,25,000

Liabilities Amount Assets Amount

Discount allowed 3,960 Gross profit b/d 86,610

Liabilities Amount Assets Amount

Creditors 18,670 Cash at bank 13,870

Debit Balances Amount Credit Balances Amount

Cash in hand 540 Sales 98,780

Account Title Amount Account Title Amount

Capital 1,00,000 Rent (Cr.) 2,100

Bad debts 1,400 Sundry debtors 62,070

Opening stock 11,460 Sales 1,40,370

Railway freight on sales 16,940 Gross profit c/d 53,190

Debit Balances Amount Credit Balances Amount

March 31 Prepaid Insurance A/c Dr. 1,400

March 31 Commission accrued A/c Dr. 2,400

March 31 Profit and Loss A/c Dr. 1,23,700

Salary 28,000 Gross Profit b/d 1,74,000

Liabilities Amount Assets Amount

Debit balances Amount Credit balances Amount

Opening stock 40,000 Capital 2,70,000

Expenses/Losses Amount Revenue/Gains Amount